China’s oil industry, with special reference to the NE fields Brian Kelleher July 2014 Historical background Since 1949, the oil industry in China has been strongly affected by the country’s growing population and political ideology, as well as its lack of domestic oil reserves. Under Communist Party rule in the 1950s, the country’s leaders sought self- sufficiency. According to Peter S. Goodman, writing in the Washington Post, this drive was fuelled by “nationalist pride and the experience of colonialism”, which fed notions that the outside world wanted to prevent China’s rise as a great power (Goodman, “Big Shift in China’s Oil Policy”). Under the rule of Mao Zedong, China – under the banner of fending for itself– focused on oil exploration throughout the country. This exploration effort was the key factor that led to the discovery of Daqing Oil Field in northeast China in 1959.The Daqing oil field in Heilongjiang Province started producing in 1960 and produced up to 2.3 million tonnes of oil by 1963 (“Oil Industry in China”), when workers carried 60-ton oil rigs in pieces with their backs and pack animals and roughnecks and engineers that developed the fields slept outdoors in sandstorms and survived on a diet of grapes and melons (Hays, “Oil and natural gas in China”).Its discovery and development in the 1960s (including building a large refinery there) – producing a significant proportion of China’s domestic oil total – made China self-sufficient in oil.During the 1960s and 1970s, Chinese companies made other significant discoveries in China’s northeast, particularly in the North China Basin, including a large portion of Bohai Bay. Production from Daqing and other significant discoveries (such as Sheng Li, Da Gang and Liaohe) yielded enough oil allow China to end its dependence on imported oil (particularly Soviet oil supplies). Figure 1: China’s oil reserves Source: (EIA, “China Overview”) Figure 2: Production and consumption of principal petroleum by region in 1995 Source: (Wang 264) During the Cultural Revolution (1966-76), Daqing was publicized as a model centre of a large industry organised on Maoist lines, receiving praise for the self-reliant “can-do” attitude of its workers, whose improvised technical innovations helped them develop a new oil field by means of only primitive equipment (“Daqing”). Figure 3: Daqing poster Source: (Hays, “Oil and Natural Gas in China”) Domestic oil supplies As stated in the previous section, China’s largest oil fields, located in the northeast and north central regions of the country, represent the backbone of the country’s domestic production. However, these fields are mature and prone to declining production. Daqing’s ubiquitous rigs still pump away, but output from the ageing field is dropping off. In 2012, Daqing produced about 800,000 bbl/d of crude oil and has maintained this level for the past decade after declines of more than 1 million bbl/d (EIA, “China Overview”). Meanwhile, China’s own oil supply has been outstripped but its economic boom. In little more than two decades then, China has changed from a net exporter of oil in the early 1990s into the world’s biggest net importer of oil in 2014, knocking the United States from its top spot (BBC, “China overtakes the US as the biggest importer of oil”).1 Figure 3: China’s oil production and consumption, 1993-2015 Source: (EIA,“International Energy Statistics and Short-Term Energy Outlook, January 2014”) 1 In 1993, China could no longer satisfy its demand for oil via domestic production and had to start importing oil. Figure 4: China Crude Production and Net Oil Import Requirements (1990- 2015). Source: (Nieh, 6) Figure 5: Top ten annual net oil importers, 2013 million barrels per day Source: U.S. Energy Information Administration, Short Term Energy Outlook, January 2014. Simply put, China’s economic boom has produced a growing hunger for energy that only foreign supplies can satisfy. Energy strategists in Beijing now see great promise in Russia. Scott Roberts of Cambridge Energy Research Associates, a consultancy firm, says that while the costs are high “there is a strategic value at stake. China’s oil security is increasingly important to its overall economic and political security and from that standpoint, yes, it makes great sense if you can ensure that the supply reaches your market reliably” (The Economist, “In the Pipeline”).2 2China’s oil consumption growth accounted for one-third of the world’s oil consumption growth in 2013, and EIA (Energy Information Administration) projects the same share in 2014 (EIA, “China Overview”). Figure 6: Daqing still pumping away Source: (Timmons, “The massive aging oil fields at the heart of China’s latest corruption purge”) Oil storage tanks, oil companies, the “Power of Siberia” pipeline As stated in the previous section, China has a huge appetite for oil (and natural gas). To meet demand China has invested billions of dollars in oil and gas related infrastructure such as pipelines and oil storage tanks. A crude-oil pipeline was built from Daqing to the refineries of Beijing in 1975 and the port city of Dalian in 1976, with some of the crude oil continuing by rail to other parts of the country.In 2005 China began work on a strategic oil reserve in coastal Zhejiang province (mainly because they must rely on imported oil) that would allow the country to operate without imports for as long as three months.The biggest emphasis, however, has been on securing new stocks abroad, particularly in neighbouring countries such as Kazakhstan and Russia. China’s oil companies (dominated by its stated owned oil companies: including PetroChina, China National Petroleum Corp and Sinopec) have invested in exploration and development in both countries.3 China has actively sought to improve the integration of the country’s domestic oil pipeline network, as well as to establish international oil pipeline connections with neighbouring countries to diversify its oil import routes (including limiting dependence on shipping lanes). Russia’s new East Siberian oil fields have become another source for Chinese crude oil imports. China National Petroleum Corp (CNPC) built a 597 mile pipeline linking with the Daqing oil field with the additional aim of reviving the fortunes of the city(Halligan, “Russia-China gas deal could ignite a shift in global trading”). The pipeline spur to China became operational in January 2011, and delivers up to 300,000 bbl/d of Russian oil to the Chinese border under an original 20-year supply contract between the two countries (EIA, “China Overview”). 3Sinopec and CNPC are the two dominant players in China's oil refining sector, respectively accounting for 41% and 30% of the capacity in 2013, according to FGE (an international energy consultancy group). Sinopec, which operated nearly 5.5 million bbl/d of total oil processing capacity in China by 2013 and holds a significant refining presence in the coastal and southern areas of China, is the second-largest oil refiner in the world (EIA, “China Overview”). Figure 7: Russian oil starts flowing to China Figure 8: “Power of Siberia”pipeline Oil spills As previously stated, Dalian is one of China’s main oil-distributing centre. Last month (June 2014), a crude oil spill from a pipeline of PetroChina, the country’s largest oil and gas producer, caused a huge fire. The oil pipeline near Dalian University was damaged and oil leaked due to a drilling operation. The spill entered into the urban sewerage pipeline network and a fire broke out at the exit of the urban pipeline (China Daily, “Crude oil spill causes NE China blaze”). Figure 9: Fire caused by the oil spill in 2014 Source: (China Daily, “Crude oil spill causes NE China blaze”) Prior to this latest oil spill, another occurred in July 2013 when two pipelines at Dalian exploded, pouring oil into the sea and causing a massive fire. Five days afterwards Greenpeace estimated that the oil had spread over 165 square miles (430 kilometres) of water. Brian Kelleher, July 2014 Work cited Business Guide to Beijing and North-East China 2006-2007. Hong Kong: China Briefing Media, 2006. Print. Chang, Andrei. "Analysis: China's Fuel Oil Reserves." UPI.N.p., 21 Dec. 2007. Web. 20 July 2014. "Cheap Russian Oil Starts Flowing To Northern China." China Bystander.N.p., 2 Jan. 2011. Web. 20 July 2014. 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